It is both justice and good practice for the perpetrators of this financial debacle to suffer, writes JOHN GAPPER
THE WORDS "suffering" and "banker" do not go together often. But this week's rescue of Bear Stearns, the Wall Street investment bank is a rare case of their collision.
When the US Federal Reserve, the nation's central bank, engineered the takeover of Bear Stearns by JPMorgan Chase, it endorsed the virtual wiping out of Bear's shares, a third of which are held by Bear's 14,000 employees.
Jamie Dimon, JPMorgan's chief executive, offered $2 a share, or about $237 million, for a bank that was worth $20 billion at its peak and $9.5 billion only three weeks ago.
In the past decade, as global financial markets have boomed, hedge funds and private equity firms have proliferated and investment bankers' traditional half-share of all the money their banks earn has produced annual bonuses reaching into the tens of millions, the rest of the world has looked on with envy and not a little financial resentment.
House prices in prime districts of New York and London inflated beyond the reach of those who were not financiers, restaurants were crowded out, private schools filled to capacity. Those with a job on Wall Street or in the City of London became the "haves" and pretty much all others were the "have-nots".
Yet, even when something went badly wrong at these institutions, their leaders walked away with millions of dollars more.
Both Chuck Prince and Stan O'Neal, the former chief executives of Citigroup and Merrill Lynch respectively, were handed tens of millions in deferred compensation - shares they were not due to receive for another year or more. As the US housing slump has spiralled into a credit crisis and central banks have been forced to intervene to stop the collapse of Northern Rock and Bear Stearns, the taxpayer has had to support institutions that acted as gigantic slot machines for those who worked there. Rightly, people outside the gilded class do not think this is fair.
Moe Tkacik, writer for the New York-based blog Jezebel, channelled banker-hate eloquently this week: "They chose this path, you know. They chose to worship Ayn Rand and wear those Paul Smith shirts and pay zero money down on their Hamptons summer homes and obnoxiously, whenever confronted by someone like myself at a bar, claim that the 'Market Solves Everything'. Let the market solve this one for them."
The New York Timesphrased it like this: "Bankers [ get] stellar rewards when the investment strategies do well, yet [ have] a floor on their losses when they go bad. They might have to forgo a bonus if investments turn sour. They might even be fired . . . But as a rule, they won't have to return the money they made in the good days when they were making all the crazy bets that eventually took their banks down."
Right on! I'm with you all the way, Moe and Grey Lady. But cool down and consider Bear.
In this case, for once, bankers are hurting. Like other investment banks, Bear paid most of its employees' annual bonuses in deferred stock. A trader might get a $1 million bonus, but a lot of that was paid in shares that only vested after three years. The idea was to keep him loyal and give him an incentive not to take "crazy bets" that would blow up later.
After the Fed rescued Bear to head off a fire sale of mortgage securities, it encouraged JPMorgan to make such a low bid that almost all deferred compensation was wiped out.
It wanted to avoid moral hazard or, in plain language, to teach bankers a lesson they would not forget.
In three weeks, the stake owned by Jimmy Cayne, Bear's wayward chairman and former chief executive, went from being worth $500 million to $12 million (at the peak, he was a billionaire). A swathe of employees lost millions, and about half are likely to lose their jobs once JPMorgan swallows up their bank and its building on Madison Avenue.
The prevailing mood at Bear is a mix of despair and anger. Dimon walked over to Bear on Wednesday to address 400 shattered Bear executives. Alongside him was Alan Schwartz, Bear's chief executive, who was quoted in the New York Timestelling the group that "we here are a collective victim of violence".
Schwartz's beef seems to be that Bear collapsed because hedge funds and other banks withdrew their business and credit lines last week, making it insolvent. Joe Lewis, the British-born financier who holds an 8 per cent stake, is so disgusted that he has publicly rejected JPMorgan's offer and Bear's shares rose well above the JPMorgan offer price this week on hopes of a higher bid.
Dream on. The JPMorgan deal went through because the Fed agreed to fund $30 billion of Bear's balance sheet, and the central bank would probably block any alternative that gave the shareholders more by withdrawing its support and pushing Bear into insolvency.
Outside the confines of Wall Street, everyone wants this to remain a bitter lesson.
So it should. Bear was a Wall Street institution that had it easy for a long time. It made big profits from trading mortgages and serving hedge funds in the housing and credit securities boom. For years, the Fed gave by keeping interest rates low and fuelling markets with cheap money. This week, the Fed took away.
Bankers are human too. They have families and, if you prick them, they probably bleed.
But it is both justice and good practice for the perpetrators of this financial debacle to suffer. Easter is the season for forgiveness, but you must make penance first.
"For years, the Fed gave by keeping interest rates low and fuelling markets with cheap money
